i Paid for Your iPhone: Mariana Mazzucato’s Spirited Defense of the Public Sector and Its Crucial Role in Innovation

Thomas Piketty isn’t the only European economist making headlines lately—though his 700-page juggernaut has tended to dominate the discussion everywhere from the New York Times and Economist to Slate and The Nation, where Tim Shenk wrote an epic and slightly snotty piece putting the book in its place. As Piketty himself pointed out in the introduction to Capital in the Twenty-first Century, economics is truly the coin on the realm in the United States—the academic discipline that probably gets the most deference and respect in policymaking circles, as well as American media and popular culture more generally. When economists speak, Americans listen (well, sort of).

But most of what they have been hearing are warmed-over Milton Friedmanisms for some time now. The self-regulating free market, supply and demand, the clumsy and inefficient state that should only intervene in rare cases of “market failure”—all of this has been tantamount to catechism in American discussion of public policy for decades. The economic crisis of the 1970s called into doubt the power of government to solve problems, crippling a postwar faith in Keynesianism and the welfare state. We have been more or less stuck in a stifling intellectual framework that critics have variously described as “Reaganism,” “Thatcherism,” and “neoliberalism” ever since. Whatever you call it, a central tenet of the new gospel is that the public sector can never, ever do anything right, and certainly not as well as the private sector.

Troubled schools? Privatize them. Social Security in trouble? Turn it over to Wall Street. Healthcare costs out of control? Add in more “markets,” and stir.

Mariana Mazzucato is here to change all that. Like Piketty, the University of Sussex economist is determined to change the discussion about economics and innovation. In the introduction to her new book The Entrepreneurial State, she admits as much. “I wrote [the book] in a style similar to the political pamphlets of the 1800s: quickly, and out of a sense of urgency,” Mazzucato says at the outset. The author was appalled to see the United Kingdom, European Union, and United States embark on belt-tightening measures that killed employment and hampered the potential for economic recovery in the period since the 2008 financial crisis, and wished to debunk the notion that government spending was the problem in need of solving.

Even more troubling for Mazzucato, though, is a problem that is both deeper and more specific than the blanket denunciation of government spending: the notion that public investments somehow “crowd out” more dynamic, creative activities by the private sector, by sucking up capital that could otherwise be spent on creating the amazing gee-whiz-mos that corporate America invents, from the pet rock to the iPhone. Conservatives, in particular, have insisted for some time that government spending may be well-intended, but bureaucrats and politicians are in no position to decide what ought to get funded—“picking winners and losers” in the market, a peril exemplified in the now-folkloric case of Solyndra—while the private sector has the expertise, industry, and profit motive to develop the innovations that people really want.*

“Demigod….. or god?”

Mazzucato offers what amounts to a photographic negative of conventional wisdom. In fact, the public sector is not sluggish, unimaginative, or “inertial”—an adjective she likes to use—but is the source of the most enterprising and daring investments in basic and applied research within modern capitalism. This is particularly true in the United States—that most celebrated bastion of rugged individualism and free enterprise, where Silicon Valley bigwigs like Peter Thiel jive themselves into a tizzy on cyberlibertarianism (see the work of Fred Turner) and pat themselves on the back for their self-reliant, individualistic creativity. The iPhone might be the prototypical product of America’s consumer-driven, high-tech capitalism, but, as Mazzucato points out, virtually none of the key innovations of this (admittedly quite excellent) product originated in the private sector. In fact, everything from GPS to touch-screen displays to SIRI herself originated in publicly funded or otherwise subsidized research.

The list of key technologies and products that have emerged, in whole or in part, from the public purse is too long for a blog post: railroads, subsidized by federal land giveaways in the nineteenth century; advances in agricultural research through land-grant universities and the Department of Agriculture; the aerospace industries; the entire concept of nuclear power; even the microwave. (63) Meanwhile, the NIH’s vast budget has steered the development of countless medical innovations, particularly in the pharmaceutical field, even if a private company is able to take advantage of publicly funded research to make a cool billion on a drug it charges patients $350,000 a year for (to cite an egregious example of “socializing risk and privatizing rewards”). (181) Mazzucato credits the “revolutionary spirit” of state-funded research for the lion’s share of groundbreaking pharmaceuticals, while the private industry has racked up patents to a significant extent by developing “me too” drugs that offer slight variations on existing medicines.

Liberals have, for years, made frustrated but mostly inchoate gestures toward the role of the state in the contemporary economy. Everything from the mortgage interest deduction to FHA loans to the Supplemental Nutrition Assistance Program (“food stamps”) props up consumer spending power in one way or another (for good and ill), while government undergirds the economy in countless ways, from enforcing intellectual property rights to subsidizing research through the National Science Foundation and National Institutes of Health. Historians have pointed out that the prosperity of the Sunbelt, a region of the United States with a particular fondness for illusions about the free market, owes much of its existence to lavish expenditures of the US government—particularly during the Cold War, when massive amounts of resources went to military bases throughout the Southeast and Southwest and ambitious projects like the Johnson Space Center in Texas. (See, for instance, Bruce Schulman’s From Cotton Belt to Sunbelt.)

Such counterarguments have chiefly served to help critics counter myths about the free market by citing exceptions to the market’s virtue: “But what about…?” Mazzucato, though, has a much more ambitious vision. She not only wants to argue that the state has inserted itself into the capitalist economy in multiple ways—some productive (fostering education and research), others not so much (subsidizing suburban sprawl). Rather, she makes a spirited case for the centrality of the state in the political economy of innovation. At least since the US government’s aggressive foray into science and technology after World War II, a vast number of the most important technological advances have originated from the public sector, in stark contrast with the image of government as stodgy and uninventive.

The military fundustrial complex: the surprise is we just droned the shit out of your house

We all know the story of DARPA (the Defense Advanced Research Projects Agency) and how it more or less invented what we now know as the Internet, above all as a visionary strategy to build a communications system that could survive all-out nuclear attack. This might seem like a one-off innovation—under the pressure of the Cold War and mutually assured destruction, the US government inadvertently stumbled on a technology that would someday be used to distribute cat videos—but Mazzucato insists that the case is actually quite typical of the role of the state in driving innovation in areas where private industry fears to tread. Conventional wisdom, she suggests, overestimates the tolerance of venture capitalists and other New Economy heroes for risk. In fact, the state is often the only agency willing and able to fund massive investments in projects that have little or no near-term payoff in terms of profit. This mission goes beyond even funding the “basic research” that occurs among starry-eyed academics on university campuses, but extends to the shepherding of new technologies to the point where they become viable and marketable—at which point private sector geniuses like Steve Jobs can swoop in and reap the benefits of a cake that the public sector has already substantially baked. “Even during a boom most firms and banks would prefer to fund low-risk incremental innovations,” Mazzucato argues, “waiting for the State to make its mark in more radical areas.” (7)

The author ardently wants policymakers and the public to abandon taken-for-granted notions about how the state and the private sector work. She argues that we should not view public and private as distinct, as if there is a private zone of the market where signals of supply and demand magically lead to revolutionary advances in technology, and a public sector that is leaden and ineffective, only responding occasionally when something goes wrong in the private sector. We all know that there are public goods, like national security, that free enterprise cannot provide and a greater power—the state—must step in to assure. Mazzucato wants us to recognize that major scientific and technological breakthroughs do not necessarily originate with venture capitalists or corporate CEOs, who are more concerned with realizing an immediate gain on a can’t-lose innovation or next quarter’s earnings report than the very long term.

And, indeed, she makes a very strong case. From the earliest days of computing and semiconductors to biotechnology and nanotechnology, the US government has taken the lead in aggressively subsidizing innovations that have transformed our lives. Whether that change is good or bad is debatable. Certainly many jobs have been lost to computerization, automation, and robotics—technologies that would likely have evolved much more slowly without the robust government subsidy that came along with the existential technological struggle of the Cold War. Local governments have also energetically fostered new industries with allocations of taxpayer dollars, founding institutions such as North Carolina’s Biotechnology Center and Microelectronics Center or California’s stem cell agency—creating new jobs but also generating new technologies whose impact and value are subject to debate. We might be able to invent incredibly effective drones or genetically program our children; whether those innovations are socially beneficial or not, it’s likely that they will be heavily subsidized by government.

In any case, today’s postindustrial or high-tech economy is very much a creature of government, whatever the paeans to the efficiency and genius of the private sector might have us believe. Mariana Mazzucato makes a spirited and effective case for the essential role of public funding for research in The Entrepreneurial State—one that should be heeded by every pundit, policymaker, and politician in a time when austerity remains the ideal and “deficits” and “debt” rank above human needs as a priority when it comes to writing a budget. It is especially tragic that the American commitment to research should be cut short after demonstrating such a remarkable record for generating innovation over the last sixty years. As Mazzucato hints time and again, countries such as Brazil and China have been making a more aggressive commitment to research in green technology in recent years, at the same time that the United States, United Kingdom, and others have cut back. (As the author points out, Brazil’s state investment bank has made striking gains by investing in “biotech and cleantech,” with an extraordinary 21.2% return on equity in 2010—compared to an anemic return of –2.3% for the World Bank’s equivalent fund.)

The US still ranks above the average for OECD countries in terms of how much GDP it spends on research and development (R&D), although it has been outstripped by Japan since the 1980s. As Mazzucato points out, Japan was the essence of a “developmental state,” with its Ministry of International Trade and Industry (MITI) working closely with academia and business to target key sectors such as electronics. Notably, the Soviet Union at the time spent dramatically more on R&D (4% of GDP in the 1970s), but its resources were spent primarily on defense; the Soviets also experienced little dynamic interaction between research, product design, distributors and users of technology, an area where the Japanese excelled through a “more horizontal economic structure” (37-9) than either the rigid Soviet system or even the United States’ classic Fordist model of top-down corporate capitalism.

The key, Mazzucato argues, is not just to throw money at research institutions or the welfare state (though she does not belittle the importance of social welfare in terms of ensuring a fair distribution of the benefits of technological and economic growth). Many incentives for business are also misguided, as the author convincingly shows; across-the-board tax cuts do little to foster important innovations, and benefits like the UK’s “patent box” policy, which taxes income from patents at a lower rate than other earnings, only reward past innovation and established parties instead of new ideas. Rather, government has a role to play in coordinating research activities to achieve targeted goals, such as technologies to mitigate climate change and generate energy more safely and efficiently. “As with all technological revolutions,” she writes, “green technology requires a bold government to take the lead—as this was the case with the Internet, biotech, and nanotech.” (7) Contrary to libertarian fantasies that fetishize the private sector, history shows that the most technologically progressive and dynamic countries—the US, Japan, Germany—have benefited from robust and active support from government to develop ideas and inventions that would never have happened otherwise.

This lesson is more urgent than ever, and not just because of today’s chronic and self-defeating obsession with cutting government spending or the impending ecological catastrophes that we face. As Mazzucato notes, “large R&D centers—like Bell Labs, Xerox PARC and Alcoa Research Lab—have become a thing of the past in big corporations… Long-term basic and applied research is not part of the strategy of ‘Big Business’ anymore.” (178) Even the heroic Apple has steadily committed a declining portion of its revenue to R&D in the last decade and a half. We can’t rely on corporate America to generate the next pathbreaking technology, even to the limited extent that we once did.

Mazzucato introduces a few new concepts in the hope that they might stick—chief among them “crowding in,” the inverse of the crowding-out that supposedly deters private sector investment:

This requires understanding the State neither as ‘meddler’ nor a simple ‘facilitator’ of economic growth. It is a key partner of the private sector—and often a more daring one, willing to take risks that business won’t… Crowding in is a concept that—while defending the public sector—is still using as a benchmark the negative: the possibility that government investment crowds out private investment, by competing for the same limited amount of savings. If we want to describe something positive and visionary, a word that is bolder and offensive, not defensive, should be used. Rather than analysing the State’s active role through its correction of ‘market failures’ (emphasized by many ‘progressive’ economists who rightly see many failures), it is necessary to build a theory of the State’s role in shaping and creating markets—more in line with the work of Karl Polanyi (1944) who emphasized how the capitalist ‘market’ has from the start been heavily shaped by State actions. (p. 5-8)

The Entrepreneurial State has a bit of the self-help book to it. Mazzucato frequently talks about a “confident” state, one that has the “confidence” to invest both wisely and audaciously in new technologies. It is almost a riff on something Tobias Fünke might write—States with Low Self-Esteem—but the economist is targeting a very real foible of Anglo-American political discourse. Since the days of Nixon and Carter, Reagan and Thatcher, the public sector has taken a pretty serious beating. Beyond the folk wisdom that anything public—schools, pools, housing—is innately inferior, there is a vast edifice of social-scientific literature that seems to validate the superiority of the private and the tragedy of the commons. As Mazzucato points out, there is a greater truth hiding in public view, evidenced by the pills we take and the phone we text on and the LCD television screen we watch. Her work is the epitome of what the great historian C. Vann Woodward called a “usable past”—a sort of Strange Career of Jim Crow for the beleaguered public sector.

Like Piketty, Mazzucato might be telling us something we already know. Yes, capitalism tends to generate inequality—when I told an older colleague about the thesis of Capital in the Twenty-First Century, he laughed out loud. Everyone knows that, he might have said. But Piketty has marshaled centuries of data over a vast area to prove beyond the shadow of a doubt that the return on capital tends to outstrip economic growth—thus enriching the rich and leaving everyone else behind. Likewise, Mariana Mazzucato has shown definitively that government has played an outsized and indispensable part in most of the innovations that have changed our lives—in medicine, telecommunications, travel, and so forth. Both of these books should be pulled from the shelf whenever anyone begins reciting ideological cant about the wisdom of the so-called free market, because scholars have begun to offer an unmistakable, empirical case to the contrary.

*Mazzucato also opens her book with a delicious quote from a letter John Maynard Keynes wrote to President Roosevelt during the 1930s. Its comically condescending tone calls to mind nothing so much as the great Kids in the Hall sketch where the little boy wants a businessman for a pet. Definitely not the world-shaking Randian demigods we often hear so much about in Silicon Valley:

Businessmen have a different set of delusions from politicians, and need, therefore, different handling. They are, however, much milder than politicians, at the same time allured and terrified by the glare of publicity, easily persuaded to be ‘patriots,’ perplexed, bemused, indeed terrified, yet only too anxious to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word, You could do anything you liked with them, if you would treat them (even the big ones), not as wolves or tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish. It is a mistake to think that they are more immoral than politicians. If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way.